10.4 First-In, First-Out (FIFO) Cost Flow
Key Takeaways
- FIFO assigns the oldest unit costs to Cost of Goods Sold and the newest unit costs to ending inventory; it is a cost-flow assumption, not a claim about which physical box left the warehouse first.
- Maple & Rivet’s March layers are 40 @ $18, 70 @ $19, 50 @ $21, and 25 @ $22. After 135 units sold, 50 remain. FIFO ending inventory is 25 × $22 + 25 × $21 = $1,075.
- FIFO cost of goods sold on those same layers is 40 × $18 + 70 × $19 + 25 × $21 = $2,575. Goods available $3,650 minus $1,075 equals $2,575.
- Perpetual FIFO and periodic FIFO produce the same $2,575 COGS and $1,075 ending inventory when the units sold and the invoice layers match and the count equals the book quantity.
- Shrinkage, sales returns restored to the wrong layer, and freight unitized in one system but not the other are mid-period complications that can split perpetual and periodic FIFO totals even though the basic layer math agrees.
FIFO is a cost-flow assumption
First-in, first-out (FIFO) says the oldest unit costs are the first costs removed from inventory when goods are sold. Ending inventory is therefore made of the most recent purchases (plus any unsold beginning layer that was never exhausted). FIFO does not require the warehouse to pick the oldest dusty carton. A stock clerk can grab the nearest lantern. The bookkeeper still peels cost from the oldest invoice layer.
AIPB’s Mastering Inventory FIFO section compares perpetual and periodic FIFO and asks you to compute purchases, sales, COGS, and ending inventory both ways. This independent OpenExamPrep section uses Maple & Rivet Trading and brass lanterns. The unit costs ($18, $19, $21, $22) and quantities (40, 70, 50, 25 purchased; 55 and 80 sold) are unique to this chapter. Chapter 11 will use different layers for LIFO and average cost so the two chapters cannot be copied from each other.
In a period of rising costs, FIFO COGS is relatively low (old cheap layers) and FIFO ending inventory is relatively high (new expensive layers). Gross profit looks stronger than under LIFO. That directional fact is enough here; do not compute LIFO until Chapter 11.
Maple & Rivet: the March stock card
Maple & Rivet sells one SKU of brass lanterns. March activity:
| Date | Event | Units | Unit cost | Layer dollars |
|---|---|---|---|---|
| Mar 1 | Beginning inventory | 40 | $18 | $720 |
| Mar 8 | Purchase | 70 | $19 | $1,330 |
| Mar 15 | Sale | 55 | — | costed below |
| Mar 22 | Purchase | 50 | $21 | $1,050 |
| Mar 28 | Sale | 80 | — | costed below |
| Mar 31 | Purchase | 25 | $22 | $550 |
Units purchased including beginning inventory: 40 + 70 + 50 + 25 = 185.
Units sold: 55 + 80 = 135.
Units that should be on hand March 31: 50.
Goods available in dollars: $720 + $1,330 + $1,050 + $550 = $3,650.
Selling prices do not affect FIFO cost assignment. Record Sales at whatever retail Maple & Rivet charged; peel COGS from the table above.
Periodic FIFO: wait until you know how many remain
Periodic FIFO ignores sale dates when assigning cost. It only needs units sold (or units left) for the whole month. 50 units remain, so ending inventory is the newest 50 units:
- All 25 units from March 31 at $22 = $550
- 25 units from March 22 at $21 = $525
- FIFO ending inventory = $1,075
The March 22 layer had 50 units; 25 of them remain and 25 of them were sold.
COGS is the oldest 135 units:
- 40 × $18 = $720
- 70 × $19 = $1,330
- 25 × $21 = $525
- FIFO COGS = $2,575
Proof: $3,650 available − $1,075 EI = $2,575. If those two figures do not add to goods available, a layer was double-counted or a purchase was dropped.
A common error is costing the 50 remaining units at $22 only: 50 × $22 = $1,100. That would require a March 31 purchase of 50, but only 25 arrived at $22. Another error is leaving the entire beginning $720 in ending inventory “because we always have a buffer.” FIFO ending inventory is not the old layer; the old layer is the first one sold.
Perpetual FIFO: cost each sale from layers then on hand
March 15 sale of 55 units. Layers on hand before the sale: 40 @ $18 and 70 @ $19. FIFO peels the oldest first:
- 40 × $18 = $720
- 15 × $19 = $285
- Sale COGS = $1,005
Remaining after March 15: 55 × $19 = $1,045.
Perpetual entry (in addition to the receivable/sales line): debit COGS $1,005, credit Inventory $1,005.
March 22 purchase adds 50 @ $21 = $1,050. On hand: 55 @ $19 + 50 @ $21 = $2,095.
March 28 sale of 80 units. Oldest remaining is still the March 8 layer:
- 55 × $19 = $1,045
- 25 × $21 = $525
- Sale COGS = $1,570
Remaining after March 28: 25 × $21 = $525.
Debit COGS $1,570, credit Inventory $1,570.
March 31 purchase adds 25 @ $22 = $550. Ending layers:
- 25 × $21 = $525
- 25 × $22 = $550
- EI = $1,075
Perpetual COGS for March = $1,005 + $1,570 = $2,575. Ending inventory $1,075. Same as periodic FIFO.
That sameness is the headline. Because FIFO always peels the oldest costs still in the pile, waiting until month-end (periodic) versus costing at each sale date (perpetual) identifies the same oldest 135 units and the same newest 50 units — if the unit counts match and you are not mixing in extra costs after the fact.
LIFO does not share this convenience. Perpetual LIFO peels the most recent purchase before each sale, so a March 31 purchase never hits a March 15 sale. Periodic LIFO would treat that March 31 layer as the first cost out for the month. Different systems, different COGS. That contrast is why FIFO is taught before LIFO, and why LIFO numbers live in Chapter 11.
Mid-period complications that can split the two FIFO totals
The “same COGS and EI” rule is not a magic identity for every real journal you will ever post. It holds for clean layer assignment of the same purchases and the same units sold. Complications:
1. Shrinkage / count difference. Perpetual books after March 31 show 50 units and $1,075. If the crew counts 48 lanterns, two units are missing. FIFO says the newest costs remain, so the count of 48 is 25 @ $22 + 23 @ $21 = $550 + $483 = $1,033. The two missing units came out of the $21 layer: 2 × $21 = $42.
Periodic FIFO with a 48-unit count sets EI at $1,033 and COGS at $3,650 − $1,033 = $2,617. That $2,617 includes the $42 shrinkage because EI is the count.
Perpetual FIFO still has recorded sales COGS of $2,575. The bookkeeper then posts shrinkage $42 (debit Shrinkage or COGS, credit Inventory). After that extra entry, expense related to the lanterns is also $2,617 and Inventory is $1,033. If someone compares unadjusted perpetual COGS $2,575 to periodic COGS $2,617 and calls FIFO “inconsistent,” they ignored shrinkage. Adjust, then compare.
2. Sales returns. Perpetual FIFO must put returned units back into the layer that was issued on that sale, not into the newest purchase. A March 16 return of 5 lanterns from the March 15 sale restores 5 × $19 (after the 40 @ $18 were already exhausted on that sale), not 5 × $22. Periodic systems may simply include the returned units in the ending count and let the equation re-peel oldest costs for the net units sold. If net units sold change, both methods should still agree on the new net — unless someone restores perpetual inventory at replacement cost.
3. Freight-in unitization. If perpetual adds the March 8 freight onto the $19 layer, that layer’s unit cost is no longer $19. If periodic parks all freight in Freight-in and dumps it into COGS through the equation without spreading it onto units, FIFO unit layers from invoices can match while total COGS still differs by how freight was allocated. Exam problems usually either (a) ignore freight in the FIFO table or (b) tell you to add freight to a specific purchase. Follow the problem. Do not silently unitize in one system and expense in the other.
4. Cutoff and late invoices. A March 31 purchase recorded in April, or an FOB shipping-point truck omitted from layers, changes goods available. Perpetual stock cards that missed the receipt will cost later sales from the wrong remaining layers. Periodic counts may still include the boxes. Title rules from section 10.1 feed FIFO math: you cannot cost a layer you did not own, and you must cost a layer you did own even if it is on a truck.
5. Interim write-downs. Applying LCNRV at March 15 on perpetual books, then buying more units March 22, can cap a layer that periodic LCNRV applied only at month-end would still carry at cost. LCNRV is Chapter 11; the only point here is that a mid-period valuation entry is a complication, not a reason to claim FIFO “always” matches.
What this chapter refuses to mix in
Do not average the $18, $19, $21, and $22 layers. That is weighted-average (periodic) or moving-average (perpetual) — Chapter 11. Do not peel the $22 layer first. That is LIFO — Chapter 11. Do not replace $1,075 with net realizable value. That is LCNRV — Chapter 11. FIFO this month is $2,575 of COGS and $1,075 of ending inventory on Maple & Rivet’s clean card, and the perpetual stock card tells the same story sale by sale.
Exam traps for section 10.4
- Costing ending inventory at the oldest prices (that is leftover LIFO instinct).
- Assuming a late purchase is large enough to fill all of EI (50 × $22 when only 25 were bought at $22).
- Using retail selling prices in the FIFO table.
- Saying perpetual FIFO uses newest costs on each sale (that is perpetual LIFO).
- Forgetting to prove COGS + EI = goods available.
- Treating a shrinkage gap as proof that FIFO perpetual and periodic “never agree,” without posting the $42 (in this example) perpetual shrinkage entry.
Maple & Rivet uses FIFO. March layers are 40 units @ $18, 70 @ $19, 50 @ $21, and 25 @ $22. Sales total 135 units, so 50 remain. FIFO ending inventory is:
Using Maple & Rivet’s March layers and 135 units sold, how do perpetual FIFO and periodic FIFO compare?
Under perpetual FIFO, Maple & Rivet’s March 15 sale of 55 units is costed from which layers?